European Commission's initial findings on geo-blocking practices in EU e-commerce

Antitrust Update

On 18 March 2016, the European Commission (Commission) released the initial findings of both its e-commerce Sector Inquiry (by DG Competition) and its consultation on geo-blocking and its effect on the e-commerce market within the EU (by DG Connect).

The e-commerce sector inquiry (Sector Inquiry) was established by the Commission to enable it better to understand, from an antitrust perspective, if and to what extent any barriers might be in place affecting the European e-commerce markets. The geo-blocking consultation (Consultation) also forms part of the Commission's antitrust inquiry into the e-commerce sector. Together, the Consultation and Sector Inquiry will feed into the Commission's Digital Single Market Strategy for the development of a 'digital single market' to complement the physical single market, as laid out in its strategy paper released in May 2015. One of the Commission's three key pillars of action set out in this strategy is to provide better access for consumers and businesses to online goods and services across Europe, and it is targeting unjustified geo-blocking (explained in detail below) as a significant barrier to this access.

The overview set out below will be of relevance to businesses active in the online sale of consumer goods and digital content.

The Sector Inquiry

The Commission's Sector Inquiry was launched because the Commission had indications that competition was potentially being restricted or distorted in the e-commerce sector, in particular in the online sale of consumer goods as well as digital content. In the course of late 2015, requests for information were sent to a variety of different businesses active in e-commerce markets in the EU, both in relation to the online sales of consumer goods as well as in relation to the distribution of digital content.

In the Sector Inquiry, the Commission obtained responses from 1,180 businesses in the consumer goods market (including 1,038 retailers) and 275 digital content service providers (including 243 content providers). However, the Commission has acknowledged that while the results presented a valuable insight into the prevalence of geo-blocking practices in the EU, they were not statistically representative of EU e-commerce markets overall.

The Consultation

The Commission's Consultation was launched in the context of its Digital Single Market Strategy to tackle unjustified geo-blocking and discrimination on the grounds of residence or nationality in the way digital services are provided to consumers.

The Consultation ran between 24 September 2015 and 28 December 2015, and gathered the views of three groups across all 28 Member States: consumers and consumer organisations; businesses and business associations; and Member State authorities with 433 replies compiled. Views were taken on the ways in which consumers and businesses were affected by geo-blocking and various policy options put forward by the Commission.

Geo-blocking and its prevalence

'Geo-blocking' occurs where online providers impose restrictions on consumers on the basis of their nationality or residence. This can include:

Blocking website access to consumers based in other Member States

Denying consumers based in other Member States the opportunity to buy goods or services online or access online content or

Automatically re-directing consumers back from websites of other Member States to their local website.

From the results of the Sector Inquiry and Consultation, it appears that geo-blocking is a widespread practice across the EU, with 90 percent of consumer respondents stating that they had experienced it when shopping online. The results of the Sector Inquiry indicate that 38 percent of consumer goods retailers and 68 percent of digital content providers on-going in geo-blocking, which was reported across several markets, including clothing, physical media, and the distribution of digital content such as music streaming, computer games and video.

The Commission's conclusions drawn from the results of the Sector Inquiry indicate that:

In the case of online sale of consumer goods, the majority of geo-blocking appears to be as a result of unilateral business decisions by the retailers themselves, with only 12 percent of retailers reporting contractual geo-blocking restrictions being imposed on them by suppliers.

In the case of online digital content, 59 percent of the responding digital content distributors indicated that they were contractually required by the suppliers of digital content to put in place geo-blocking.

Justified and unjustified geo-blocking

The Commission's stated plan is to tackle 'unjustified' geo-blocking and one of the key topics addressed in the Consultation was what might constitute 'justified' and 'unjustified' geo-blocking.

Aside from where geo-blocking was implemented in order to meet a legal obligation (for example in response to censorship laws or prohibition of the sale of certain goods), there was a significant division between the consumer respondents and businesses on what should constitute justified geo-blocking. Few consumer respondents were in favour of broad categories of justified restrictions, while businesses took an opposing view.

Most businesses and some authorities were concerned at the costs of doing business, requiring retailers to meet orders from customers based in other Member States, particularly in terms of the logistics, language barriers and different regulatory and tax environments. Several businesses submitted that there would be an overall negative effect if they were not allowed to differentiate on price to reflect these factors and charge consumers from other Member States higher prices, as otherwise these costs would need to be recovered through price increases imposed on all their customers. Both businesses and Member State authorities also stressed the need not to interfere with business' freedom to contract, and identified the possible conflict with copyright and licensing laws.

Many respondents to the Consultation requested greater clarification from the Commission on what constitutes justified and unjustified geo-blocking. Several businesses have also requested that the Commission comment on the implications of any future initiatives for copyright and licensing issues.

Policy options

The Commission recognises that are a number of reasons why retailers and service providers might choose not to sell cross-border and "the freedom to choose one's trading partner remains the basic principle". Nevertheless, the Commission considers it a "key priority of the Commission to address unjustified barriers to cross-border e-commerce".

Though more popular with the consumer respondents, the majority of respondents to the Consultation were in favour of a ban on blocking access to sites completely, and a majority were in favour of businesses improving the transparency of their different terms of business across the EU (though businesses were cautious about the administrative burden this could cause).

Price discrimination and delivery costs were another area in which consumer respondents and business respondents to the Consultation clearly disagreed. Consumer respondents largely favoured a completely open market in the acquisition of goods and services. However, a majority of business respondents opposed introducing measures which would require them to accept cross-border transactions from users throughout the EU, particularly under the same terms to each user, due to asymmetries in the costs and regulations faced when providing goods and services to different Member States.

Implementation

There was strong support (72 percent) from all respondents for the idea of giving the Commission and national competition authorities monitoring power and oversight of the implementation of geo-blocking powers. A similar proportion of respondents supported the implementation of a cross-border cooperation mechanism between the authorities.

What happens next?

The Commission will publish legislative proposals in relation to the Digital Single Market in May this year.

Both the Sector Inquiry and Consultation reports will feed into a wider study into the barriers to e-commerce in the EU, the results of which will be available in the first quarter of 2017.

If the Commission identifies specific concerns as regards competition law infringements relates to geo-blocking and/or any other issues, it could open individual investigations with a view to ensuring compliance with EU's competition laws. However, the Commission has stressed that any competition enforcement measure would need to be assessed on a case-by-case basis, and any justifications put forward by the business(es) would need to be considered.

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